Sharing corporate info on Facebook isn’t public enough for the SEC

It's a pretty simple rule: public companies are required to disclose "material information" publicly, not just to a select few. That ensures that everyone investing in a stock has a fair chance to trade on it, not just a select group of insiders. The Securities and Exchange Commission adopted Regulation FD in 2000.

Yesterday, Netflix revealed that its CEO, Reed Hastings, may be in trouble for violating the rule. The secret forum where Hastings revealed this allegedly secret information? Facebook, where Netflix has more than 200,000 subscribers.

"Netflix monthly viewing exceeded 1 billion hours for the first time ever in June," Hastings wrote in a Facebook post on July 3, according to a report in Reuters.

The SEC says that was material information that should have been disclosed "publicly," which in the SEC's terms apparently means via press release or filing an 8-K form with the SEC. Netflix and Reed have received a so-called "Wells Notice," indicating that the SEC may take legal action against them, either in the form of a cease-and-desist order or a lawsuit.

Netflix responded to the brouhaha yesterday, at the same time that it was disclosed in a regulatory filing. "SEC staff questions a Facebook post," wrote Hastings. "Fascinating social media story." He went on to say that the billion-hours fact wasn't really "material" in the first place, and that in any case, a popular Facebook page is about as public a forum as there is.

Hastings continued:

First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.

Second, while we think my public Facebook post is public, we don't currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not “material” to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.

Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.

We remain optimistic this can be cleared up quickly through the SEC's review process.

Already, investor sites are musing about whether the SEC needs to rethink its social media rules. And there are probably other examples out there, once you start looking. The Street noted that Tesla's CEO recently announced the company was cash-flow positive in a tweet, for instance.

58 Reader Comments

I understand a rule is a rule but there are a lot of other bigger more significant problems that executives pull.

Hell, many websites nowadays write entire news articles based on Tweets and Facebook postings. They have become avenue of releasing info to the public, to the public who actively have interest in your company. Why else would they Like or subscribe to your tweets?

People who are likely to invest in Netflix might overlap somewhat with the group likely to "like" them on a social-networking site, but they're by no means equivalent. Although you could make the argument that the press monitors Facebook a lot more closely than generic "yay, us!" press releases.

That is like saying I am not a Wall Street Journal subscriber therefore the information is not public.

I agree with the sentiment of your post. The only question I have is whether something written in the Wall Street Journal is typically only put their after a SEC filing, or if it can be done all on its own. If the Wall Street Journal story is sufficient then so is a post in a public forum to which anyone can subscribe. That is the kind of thing I am not well versed in, and causes me to hesitate on passing judgement. The same standard should apply either way.

I'm with the SEC here. Investors should not be expected to follow every corporate exec on every social network just in case they publish something material in one of those. Yes they're public, but in the way a shopping mall is, you have to go there to know what happened. That's why the SEC is saying proper press release or proper filing to investors.

That is like saying I am not a Wall Street Journal subscriber therefore the information is not public.

I agree with the sentiment of your post. The only question I have is whether something written in the Wall Street Journal is typically only put their after a SEC filing, or if it can be done all on its own. If the Wall Street Journal story is sufficient then so is a post in a public forum to which anyone can subscribe. That is the kind of thing I am not well versed in, and causes me to hesitate on passing judgement. The same standard should apply either way.

If the information was disclosed only to the WSJ, doesn't that mean the WSJ staff has advantageous access to the information before it was printed? The fact that it would eventually be covered by other papers and news outlets doesn't change the fact that initially the information was released to a restricted group (first the WSJ staff, later the WSJ subscribers).

If the information was disclosed only to, say, the Kansas City Star, and printed only by that paper, would that be considered public disclosure available to everyone? I wouldn't think so.

I'm with the SEC here. Investors should not be expected to follow every corporate exec on every social network just in case they publish something material in one of those. Yes they're public, but in the way a shopping mall is, you have to go there to know what happened. That's why the SEC is saying proper press release or proper filing to investors.

That is my line of thinking as well. That would lead to an exponential growth in monitoring required. the SEC probably wants to avoid that.

If Hastings had posted, "We have developed a new algorithm that will allow us to stream video using a tenth of the bandwidth we used to need" then I could see the SEC getting all up in his business. All he posted was a milestone that has absolutely zero affect on investors. Somebody at the SEC is pissed cause they took "Castle" off instant viewing.

Non-users of Facebook are unable to see those posts. Therefore it's not public. That seems straightforward to me.

Apparently Hasting's Facebook page is public so non-users can read it although I haven't gone there to check.

Whenever I follow a link to a Facebook page, it takes me to a log-in page. Even for things that are supposedly public. Public on Facebook only means it can be read by other Facebook users.

If anyone wants to claim otherwise, post a link to Facebook content that can be read without logging in. I'll be happy to check.

Looks like we're both right. Links to individual Facebook posts seem to be open to the public however when I tried to go Hastings' page to see all of his posts it asked for a login. So it would seem that only people who have Facebook accounts can follow the posts but they can forward them to other people to read.

Social media or not, in what way is this material? Last month it was "nearly a billion hours" which could be anything up to an hour short of that. This month it's more than a billion hours, which could be a billion plus one.

It's not a real metric and doesn't really indicate anything new. There's not some magical influx of revenue just because one crosses it. There's no super new tax status that one gets. It doesn't indicate a substantial increase in subscriber base.

I saw a sign outside a McDonalds that said "Billions and Billions served". Did they file the sign with the SEC? I didn't see it in the WSJ, which is apparently the only way to make something "public", right?

I think the SEC is barking at nothing. The guy was bragging about his company. Not every piece of minutia about a company should go through the SEC, especially if it's not only easily found information, not out of the operating norm, or blatantly restricted. Apparently, this information was presented by CNN. Is that public enough? What if I don't subscribe to CNN? What if I live in a log cabin in the woods. Should the SEC investigate any information that doesn't reach me? Are they hiring?

I'm with the SEC here. Investors should not be expected to follow every corporate exec on every social network just in case they publish something material in one of those. Yes they're public, but in the way a shopping mall is, you have to go there to know what happened. That's why the SEC is saying proper press release or proper filing to investors.

I agree with you, but I don't think that's what's happening here. The main debate really seems to be over was this a material piece of info? It sounds like Hastings doesn't think so, and they seem to be indicating that if they thought it was, they would have used the appropriate channels for release.

It wasn't that they were trying to hide anything - they were just more bragging/advertising on Facebook. Which seems to be exactly why they have a Facebook page.

Non-users of Facebook are unable to see those posts. Therefore it's not public. That seems straightforward to me.

If that's true, it would seem that the simplest solution would be for Netflix to allow their Facebook page to be seen by anyone with or without an account. I assume that's one of the privacy options available to them, right?

I'm surprised Hastings tried to argue that a Facebook post qualifies as public disclosure under the SEC rules. The rules are the rules, and a Facebook post does not satisfy those rules. You would hope that a CEO of a big public company would be well aware of that fact.

However I agree with his argument that mentioning the 1 billion viewing hours isn't material information in the context that the company has been disclosing this type of information publicly on a frequent, regular basis. Just because 1 billion is a nice, round number doesn't make it any more "material" than 973 million or any other number.

If it had been the first time anyone at Netflix had disclosed information about viewing hours, that would have been a different story. But it wasn't.

I'm with the SEC here. Investors should not be expected to follow every corporate exec on every social network just in case they publish something material in one of those. Yes they're public, but in the way a shopping mall is, you have to go there to know what happened. That's why the SEC is saying proper press release or proper filing to investors.

I agree with you, but I don't think that's what's happening here. The main debate really seems to be over was this a material piece of info? It sounds like Hastings doesn't think so, and they seem to be indicating that if they thought it was, they would have used the appropriate channels for release.

It wasn't that they were trying to hide anything - they were just more bragging/advertising on Facebook. Which seems to be exactly why they have a Facebook page.

Agreed. There are two issues that Hastings raises in his response: whether or not the information was public and whether or not the information was material. I think he's right that the information was not material however I disagree with his assertion that Facebook is suitably public if it was.

I'm with the SEC here. Investors should not be expected to follow every corporate exec on every social network just in case they publish something material in one of those. Yes they're public, but in the way a shopping mall is, you have to go there to know what happened. That's why the SEC is saying proper press release or proper filing to investors.

I agree with you, but I don't think that's what's happening here. The main debate really seems to be over was this a material piece of info? It sounds like Hastings doesn't think so, and they seem to be indicating that if they thought it was, they would have used the appropriate channels for release.

It wasn't that they were trying to hide anything - they were just more bragging/advertising on Facebook. Which seems to be exactly why they have a Facebook page.

Agreed. There are two issues that Hastings raises in his response: whether or not the information was public and whether or not the information was material. I think he's right that the information was not material however I disagree with his assertion that Facebook is suitably public if it was.

Good point about the second issue - I'd forgotten that. Though I don't know what counts as public... As someone else mentioned, is just posting it in a random newspaper enough? What do they have to do to be "public"? If there isn't a minimum audience size, then I suppose Facebook could count. Not sure I agree with the idea, but you could make the case.

Non-users of Facebook are unable to see those posts. Therefore it's not public. That seems straightforward to me.

If that's true, it would seem that the simplest solution would be for Netflix to allow their Facebook page to be seen by anyone with or without an account. I assume that's one of the privacy options available to them, right?

That would still require someone to pay attention to Facebook to know what's going on with Netflix, which is the sticking point for me. Sorry, but I object strenuously to the the idea that I have to go to any one specific source to get company statements 'straight from the horse's mouth'. That's the point that the people bringing up the WSJ are missing - the SEC said "press release". IOW, a public announcement distributed to lots of different news outlets.

I'm with the SEC here. Investors should not be expected to follow every corporate exec on every social network just in case they publish something material in one of those. Yes they're public, but in the way a shopping mall is, you have to go there to know what happened. That's why the SEC is saying proper press release or proper filing to investors.

I agree with you, but I don't think that's what's happening here. The main debate really seems to be over was this a material piece of info? It sounds like Hastings doesn't think so, and they seem to be indicating that if they thought it was, they would have used the appropriate channels for release.

It wasn't that they were trying to hide anything - they were just more bragging/advertising on Facebook. Which seems to be exactly why they have a Facebook page.

Agreed. There are two issues that Hastings raises in his response: whether or not the information was public and whether or not the information was material. I think he's right that the information was not material however I disagree with his assertion that Facebook is suitably public if it was.

Good point about the second issue - I'd forgotten that. Though I don't know what counts as public... As someone else mentioned, is just posting it in a random newspaper enough? What do they have to do to be "public"? If there isn't a minimum audience size, then I suppose Facebook could count. Not sure I agree with the idea, but you could make the case.

The SEC statement said it had to be a press release or an SEC filing. Both channels that would be regularly monitored by interested investors.

Those are not the only two options under Regulation FD, which is surprising vague if you actually read it:

Quote:

An issuer shall be exempt from the requirement to furnish or file a Form 8-K if it instead disseminates the information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

The SEC has specifically indicated that a press release will suffice. Other specifically allowed methods are including information in a widely publicized conference call or posting on the company's web site.

Non-users of Facebook are unable to see those posts. Therefore it's not public. That seems straightforward to me.

If that's true, it would seem that the simplest solution would be for Netflix to allow their Facebook page to be seen by anyone with or without an account. I assume that's one of the privacy options available to them, right?

That would still require someone to pay attention to Facebook to know what's going on with Netflix, which is the sticking point for me. Sorry, but I object strenuously to the the idea that I have to go to any one specific source to get company statements 'straight from the horse's mouth'. That's the point that the people bringing up the WSJ are missing - the SEC said "press release". IOW, a public announcement distributed to lots of different news outlets.

The SEC does allow single-source disclosure. But that single-source really needs to be directly from the company (its web site or a widely publicized conference call are two possible options). A Facebook post probably doesn't cut it. Even more of a problem is that it wasn't on the company's Facebook page, but the CEO's. So you wouldn't just have to follow the company page for any company you were interested in, but you'd have to follow the pages of all the senior executives. The SEC will definitely not like that argument.

Why is this even an issue? Have we forgotten the First Amendment? Of course, because the fact that the SEC even exists means we've forgotten the Tenth Amendment. What a waste of an organization- it needs to be abolished immediately.

The SEC statement said it had to be a press release or an SEC filing. Both channels that would be regularly monitored by interested investors.

The SEC said no such thing. Those are not the only options for disseminating information pursuant to Reg FD.

That's not entirely clear. According to the Reuters article:

Quote:

The SEC believes that figure is material information that should have been disclosed in a press release or regulatory filing, according to Hastings' letter.

I'll agree I overstated but what they actual said to Netflix hasn't been explicitly published and pretty much every article on this says the SEC wanted to see either a press release or regulatory filing.

He went on to say that the billion-hours fact wasn't really "material" in the first place, and that in any case, a popular Facebook page is about as public a forum as there is......

.....Already, investor sites are musing about whether the SEC needs to rethink its social media rules. And there are probably other examples out there, once you start looking. The Street noted that Tesla's CEO recently announced the company was cash-flow positive in a tweet, for instance

Hastings is wriong about Facbook being 'as public a forum as there is".

I do not subscribe to or involve myself with FB. If I were an investor in Netflix I would not have known anything if he was disclosing public company information via FB.

Just beacuse there are supposedly 1 Billion+ active Accounts (lets not call them actual people - please !) does not mean that the other 6± Billion people on the planet are FB members. The information gettign out to bloggers and other media source from the FB post - again does not gaurantee information getting to investors. This is the same arguement that Copyright Activists have about catching Infringers using only an IP Address. It's half-assed and lazy.

Also why should I be required or have to go though a 3rd party company in order to find out investor information on a 2nd party company that I might be directly investing in ? What kickback is Hastings recieving that he is not disclosing and why is he pushing traffic to FB and away from his company ?

AND posting to 200,000 FB followers - is more likely posting to a bunch of folks that use Netflix as opposed to actual stock owners in the company. So no the SEC does not need to "rethink" its social media rules.

The SEC does however need to do better research before threatening a company with fines and penalties - wasting tax payer money - before it knows whether or not Netflix has complied with its current active rules.

The SEC statement said it had to be a press release or an SEC filing. Both channels that would be regularly monitored by interested investors.

The SEC said no such thing. Those are not the only options for disseminating information pursuant to Reg FD.

That's not entirely clear. According to the Reuters article:

Quote:

The SEC believes that figure is material information that should have been disclosed in a press release or regulatory filing, according to Hastings' letter.

I'll agree I overstated but what they actual said to Netflix hasn't been explicitly published and pretty much every article on this says the SEC wanted to see either a press release or regulatory filing.

All of those articles are wrong. That's not what the regulation says. It's not even how the SEC describes the regulation in it's FAQs.

From the actual text of the regulation:

Quote:

An issuer shall be exempt from the requirement to furnish or file a Form 8-K if it instead disseminates the information through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

In its discussion of the regulation, the SEC explicitly allows for press releases, posting to the company's website and discussing information in widely-publicized conference calls (or webcasts).

Non-users of Facebook are unable to see those posts. Therefore it's not public. That seems straightforward to me.

If that's true, it would seem that the simplest solution would be for Netflix to allow their Facebook page to be seen by anyone with or without an account. I assume that's one of the privacy options available to them, right?

If I were a Netflix investor (and NOT a FB member) - why should I have to go out to a 3rd party company (FB) in order to read about a public disclosure from Netflix ? I dont give a damn if they have a 'public' FB page or not. FB is not who I'd have invested in.

This is like me walking into Best Buy to purchase a TV and having to go to McDonald's to pick it up.

I guess you could extend your nonusers metaphor further by saying "well investors might not be obligated to check that" but that strawman applies just the same as if it was a full front page ad in the earlier mentioned WSJ, netflix homepage replacement, SEC filing, etc or something.

Throwing out a neat fact about the company, on facebook or just to the people your having lunch with, shouldn't be any of the SEC's business. If there is some gathering of key investors on a yacht in Miami where he sort of mentions a potential multi-billion dollar loss, then yeah, it should be made public knowledge (but even then, the SEC needs to wait for them to NOT do it rather than jump up and down because they were not the first to know).

I bet someone at the SEC will now be tasked with "friending" every fortune 500 compnay, lol.